Income splitting is a tax planning strategy that can help Canadian families reduce their tax burden by redistributing income among family members. In this blog, we’ll provide you with a comprehensive guide to income splitting in Canada for 2023. We’ll cover everything from what income splitting is to how it works, what’s exempted from TOSI, and frequently asked questions.
What is Income Splitting?
Income splitting is a tax planning strategy that allows families to reduce their overall tax liability by redistributing income among family members. By doing so, families can take advantage of lower tax brackets to reduce their tax bills.
Income Splitting in Canada: How It Operates in the Present Scenario
In Canada, income splitting is facilitated through several tax credits and deductions. One of the most common ways to split income is through a Spousal RRSP. This allows higher-earning spouses to contribute to their lower-earning spouse’s RRSP account, and the contribution can be deducted from the higher-earning spouse’s income. Another way to split income is through the Canada Child Benefit (CCB), which provides tax-free payments to families with children under the age of 18.
Exempted from TOSI in Canada Income Splitting?
The Tax on Split Income (TOSI) is a set of rules that prevents high-income earners from using income splitting to reduce their tax liability. However, certain types of income splitting are exempt from TOSI, such as income earned from a related business, where the individual actively participates in the business for at least 20 hours a week. Income earned from property inherited from a spouse or common-law partner is also exempt from TOSI, as is income earned from property transferred to a spouse or common-law partner as part of a settlement agreement or court order following a relationship breakdown.
Frequently Asked Questions
Is income splitting legal in Canada?
Yes, income splitting is legal in Canada as long as it follows the CRA’s rules and regulations.
Who can benefit from income splitting?
Families with a large income gap between spouses or with children under the age of 18 can benefit the most from income splitting.
Can income splitting reduce the overall tax burden?
Yes, income splitting can reduce the overall tax burden for families by taking advantage of lower tax brackets.
In conclusion, income splitting is a valuable tax planning strategy for Canadian families to reduce their tax liability. By understanding the rules and regulations set out by the CRA, families can take advantage of various tax credits and deductions to maximize their tax savings. We hope this guide has provided you with a comprehensive understanding of income splitting in Canada for the year 2023.